Last editedApr 20222 min read
Throughout the Covid-19 pandemic, many businesses fell on hard times and found their cash flows being restricted. In such uncertain times, it’s important that business leaders are fully aware of their options and fully in control of their expenses.
Unless you’ve studied for a degree in accountancy training, you might not be aware of the difference between capital expenditure and expense. It’s a difference, however, that will fundamentally change how you perceive your business expenses and maximise your tax reductions once you understand it.
Expenditure vs expense
In a nutshell, an expense relates to all purchases you make on the goods and services that keep your business running. For example, if you’re a restaurant, the fresh ingredients that make up your meals and the wages paid to your waiting and kitchen staff are all expenses.
Generally speaking, these are costs that can be subtracted from your gross income. These expenses are often tax deductible and are offset by revenue. Expenses are the most immediate metric for measuring the short-term financial health of your business.
An expenditure, meanwhile, is an investment that is used to increase the long-term value of your company. Most often, these are fixed assets – physical property or equipment – that you purchase to help you generate more revenue over the long term. Sticking with the restaurant example, a new pizza oven or a games machine for the bar area would be seen as an expenditure rather than an expense.
You might also commonly see expenses and expenditures referred to as operating expenses (OpEx) or capital expenditures (CapEx).
The difference between expense and expenditure
Fundamentally, from a tax perspective, the difference between expense and expenditure is all about the short term vs the long term. Expenditures, for example, usually depreciate over time and this depreciation can be used as a tax deduction. Expenses are also entirely tax deductible, whereas expenditures are only partly tax deductible.
Another key difference is in where expenses and expenditures are logged. Expenditures, for example, will not appear on your income statement but on the balance sheet, whereas expenses will appear on the income statement. That’s because income statements examine expenses over a specific accounting period and exist to help businesses make informed decisions to meet financial benchmarks.
Column A or column B?
As a small business, it’s perfectly reasonable to expect you might not be able to afford a bespoke accounting department and will have to keep your own books. In this case, you might often wonder whether to log something as an expense or an expenditure.
As a rule of thumb, start by asking yourself if this is a large purchase that’s going to remain a part of your business for several years or a smaller, more routine expense. Of course, some expenses could be linked to expenditure, for example, maintenance costs on machinery. But as this is not enhancing the product in any way, only keeping it operational, this would still be classed as an expense.
Keeping track of expenses and expenditures
The best way to ensure you’re not left confused and overwhelmed by your expenses and expenditures is to invest in accounting software that can take care of the hard work for you. You might also want to consider leasing equipment instead of making lots of expensive capital investments. Whatever small steps you can take to make your life easier, it’s always a good idea to take them as often as possible.
We can help
If you’re interested in finding out more about expenses, expenditures, or any other aspect of your finances, then get in touch with our financial experts at GoCardless. Find out how GoCardless can help you with ad hoc payments or recurring payments.